Certified Government Financial Manager (CGFM) Practice Exam 2025 - Free CGFM Practice Questions and Study Guide

A tax that exempts certain income sources is an example of tax expenditure policy because it refers to the way taxes are structured to provide certain benefits or privileges through exemptions, deductions, or credits. This type of policy results in a reduction of revenue for the government by not taxing specific types of income, thereby incentivizing or supporting certain behaviors, industries, or populations.

Tax expenditures often aim to achieve specific economic or social goals, such as encouraging investments in renewable energy or assisting low-income households, by lowering their tax burden for certain income sources. This approach can significantly impact overall tax liability and the efficiency of the tax system.

In contrast, a flat tax policy imposes a uniform rate on all income, regardless of the source, while a progressive tax policy taxes higher income at higher rates, thus attaching no exemptions specifically to certain income types. Regressive tax policy, on the other hand, tends to take a larger percentage from lower-income earners compared to wealthier individuals, which does not align with the premise of exempting particular sources of income.